Instant payments tech invites a new wave of deposit fraud

This scenario may feel familiar: You deposit a check into your checking account (also known as a demand deposit account [DDA] or current account) and are told that only a portion of your funds will be available for several days.

Almost certainly you wish the funds were available immediately or the next day. This frustration illustrates the inherent conflict between delivering a great customer experience—in this case, fast access to your money—and mitigating the risk of fraud, which almost always hits the bank’s bottom line.

Deposit fraud can take multiple forms and angles; sometimes consumers themselves maliciously use the banking system to perpetrate fraud, which is known as first-party fraud. Other times, fraudsters are using accounts to move and transfer money, a criminal practice known as third-party fraud.

It’s true that catching deposit fraud is a significant challenge in the era of real-time payments. Funds that are released before deposits clear, i.e. the source of the money is confirmed to be available and legitimate, can be instantly withdrawn or moved out of a checking account via real-time payment mechanisms including person-to-person (P2P) types such as Zelle, wire transfer or intraday Automated Clearing House (ACH).

Customers’ expectations for real-time availability of their funds have been years in the making. Banks have traditionally held funds on deposited checks until funds clear. Over the last two decades, the “hold” period has shrunk considerably, from 10 business days to typically now three, one or zero. With a zero wait, all funds are instantly available.

At the same time, deposits over $10,000 take longer to become available as larger amounts are more heavily scrutinized. In addition, they are subject to increased compliance requirements for money laundering and other financial crimes—controls that are regulated by law. Altogether, the “hold” strategies your bank takes depend on risk associated with both the depositing account, the account on which the funds are drawn, and legal requirements.

While the incidence rate on deposit account fraud is lower than credit card transaction fraud—approximately one check or automated clearing house (ACH) transaction in every 20,000—the financial damage inflicted can be enormous.

A criminal’s main method of committing deposit account fraud takes advantage of the time during which funds are still clearing. The fraudster may deposit a check into an account under their control —sometimes involving yet another crime,check fraud—and then withdraw or transfer the money before the bank realizes the check is bad and the funds are not actually available.

Criminals often involve an innocent party in their scheme. This practice, commonly called a "money-mule" scam, has unsuspecting and legitimate consumers move funds for the fraudster.

Here’s one example of how that may play out. A nice person approaches you on the street and asks you to cash a check for them. They are from out of town, their ID card and wallet were stolen, and they have to get home. You have empathy for this person, so you agree, and you deposit the check into your account and give them the cash. While you walk away from this transaction feeling that you did a good deed, just a few days later, your bank contacts you to let you know that the check that you deposited was returned for insufficient funds.

Another common scam includes the transfer of money into a consumer’s account. The fraudster claims they accidentally sent too much money, then asks the person for a refund via a wire or real-time payment for the overage. The wire or real-time transfer clears first, and the initial transfer bounces.

In both scenarios, the innocent consumer becomes liable for participation in the fraud because they are responsible the money that passes through their account.

Money mule scams are some of the most precarious scams because they can turn consumers into criminals.

Financial institutions should help consumers educate themselves before falling victim. People should ask themselves the following questions: “Is the offer too good to be true?” Or: “Does this secret shopper job offer make sense? And the ultimate question is, “Does this seem right?”

Don’t rely on money from a check unless you know and trust the person you are dealing with. Appeal to your common sense and protect yourself. Keep watch for scams that are evolving around current events such as the 2020 Census or other natural disasters.